Thursday, December 9, 2010

"Is Netflix Streaming Its Way Towards Disaster?" (NFLX)

Good article today by Edward Epstein about Netflix (NFLX).

Netflix was able to get really good licensing deals on streaming content because they did the deals before the content owners realized the value. Unfortunately, the deals are not permanent and will have to be renewed. As Epstein notes,

The brutal reality is Netflix’s bargain days for streaming movies and television is coming to an end. As everyone else in the licensing game, Netflix will have to pay real world prices for content. Just the output deal it announced with three of the weakest studios,  Paramount, LionsGate and  MGM will cost it $200 million a year, a sum that exceeds its operating income last year. And if it wants the kind of output deals the other pay channels have, it will have to pay a great deal more than that.
Yet Netflix has been on a tear, up 247% year-to-date!

Netflix has an enterprise value of close to $10 billion, which is a very expensive 33x EBITDA. That seems to imply that Netflix will permanently rule the roost and be able to get content at prices that leave room for substantial profit. But why would the content owners let Netflix extract those rents?

Who would have guessed, though, that Blockbuster would have utterly failed to make the transition to new forms of content distribution?

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